You've read the literature, done your due diligence
considered the statistics on success, and know a franchise is the
way you want to get into business.

But before you sign on the dotted line, answer this question
first: Where will you get the money to finance the franchise and
royalty fees, inventory and working capital?

We asked five franchisees across the nation how they financed
their businesses and came up with some traditional as well as some
distinctive solutions to this often problematic issue.

Private Matters

Franchising seems to be infectious, at least for 40-year-old
Douglas York. After spending several years as a contractor whose
assignments included constructing a number of stores for
franchisors nationwide, he decided to get involved in the finished
product. Joining forces with his wife, Frances, a licensed
cosmetologist, York purchased a Great Clips franchise in
Jacksonville, Florida.

"When we got into Great Clips, you could do three stores in
two years [as a discount package]," says York, who opened the
allotted stores in June 1998, December 1998 and this April,
surpassing his commitment with a fourth location in July.

The father of three had to come up with $120,000 for each
location and decided to go with the nonbank lender his franchisor
recommended. "Textron Financial gave us a loan based strictly
on equipment without a ton of paperwork," explains York.
"I did talk to banks, but they couldn't offer anything
better than Textron, and with Textron, I didn't have to put up
my house [as collateral]."

To open his first store, York secured $60,000 from Textron by
submitting two years-worth of tax returns and his personal savings
to complete the $120,000 investment. "You shouldn't
finance yourself to the hilt," York says. "You have to
leave yourself a little room to maneuver."

Family Ties

Friends, family and your own resources are typically your first
options when it comes to financing a business. This was
particularly true for Paula Bush and Christina Domecq.

Domecq, who started her New Horizons Computer Learning Center in
White Plains, New York, in May 1998, now employs 35 people and
projects $2.3 million in sales for this year.

To achieve this high level of success, the 22-year-old
entrepreneur had to first tap the family coffers for the $500,000
start-up cash the franchisor required.

"I tried to get an SBA loan, and they flat out told me no
because I was too young and didn't own a house," says
Domecq, who began honing her entrepreneurial skills at age 16 while
working for her father's wine and spirits distribution
company.

In addition to the SBA, Domecq approached banks and even a loan
broker, with similar results. So she turned to her family: an aunt,
a grandmother and her dad. "They loaned me the money, and
I'm paying them back with interest at the prime rate,"
says Domecq.

But Domecq admits convincing her father to ante up was no easy
task. His major concerns? "I was young, and I wan't a
business major in college," she says. What finally convinced
him was Domecq's carefully researched, 120-page business plan
and the savvy management team she had assembled.

Instead of accepting her family's money on a handshake
arrangement, Domecq got a lawyer to create loan papers for each
relative. "That's not because my family isn't
close," explains Domecq. It was simply to keep the transaction
professional.

Paula Bush also went to a relative for the money she needed to
start her Pressed4Time dry cleaning and shoe repair pick-up and
delivery franchise. Unlike Domecq, however, Bush doesn't have
to repay her mother the $12,000 she borrowed. But that doesn't
mean she went to the "Bank of Mom" unprepared. "My
mother has always been my mentor and friend, and when I decided to
go into business for myself in 1997, she was supportive both
emotionally and financially," says the Methuen, Massachusetts
entrepreneur.

Bush explained to her mother what she wanted to do and showed
her her business plan. "She was never concerned about being
repaid but asked questions about how I was going to be paid by the
customers. I could easily answer her questions, because I had asked
the same questions myself before I made the decision to
invest." In addition to showing her mother a business plan,
Bush also had to check the laws governing how much money her mom
could give her as a gift without paying a penalty.

Bush's gamble paid off: The 54-year-old former sales rep was
able to start drawing a salary in only her third month in business
and is currently generating sales of $12,000 a month.

ABCs of SBA

Once a retailer, always a retailer could be aptly be called the
them of Brian McDowell's life. After spending more than two
decades progressing from the lowliest clerk position at Kmart at
age 16 to president and co-owner of Michael's Stores Inc.'s
17-store Canadian division. McDowell began contemplating other
paths. "I looked at Subway and an oil-lube place,"
remembers the 41-year old, who left the art-supply company when he
and his partners were bought out.

During his search, McDowell ran into a friend who had purchased
a collectibles franchise called Country Clutter. "It seemed
like a lot of fun. You could purchase merchandise whenever and
wherever you wanted as long as it fit the motif of the store,"
he says. He liked the idea so much, he's developing not one,
but two stores simultaneously. "I arranged to get the
Glendale, California, location, and while that was going on,
Orange, [California,] store came up."

McDowell provided about one-third of the start-up investment,
approximately $300,000 per location, himself. The remainder came in
the form of an SBA-guaranteed loan.

And although he'd heard the horror stories associated with
SBA loans, McDowell's experience was good. "Obtaining the
loan was no more difficult than I thought it would be," he
says, crediting the smoothness of his application process to his
decision to use a loan broker. "She did a lot of the work and
knew where to shop [the loan]."

McDowell's strong credit report and years of retailing
experience were also important factors in his favor, as was Country
Clutter's solid business history. McDowell eventually pledged a
certificate of deposit as collateral for one store and his home for
the other.

His advice to prospective franchisees? Put yourself in the
banker's shoes. "What if you had $200,000 and someone
wanted to borrow it? I would want to know a heck of a lot about
them and how they were going to pay it back!"

Financed by an Angel

You might think finding an angel investor for your franchise
would require divine intervention, but Denver entrepreneur Barney
Rudden knows what it really takes is connections.

It was a formula my dad had used for a long time," says
28-year-old Rudden of the interent plus return-on-investment
combination has used to entice 15 angels to invest a total of
$300,000 in his first Colortyme rent-to-own franchise in 1995.
"I didn't try other routes because I was just out of
college and didn't have an established credit history or any of
the other requirements [for a traditional loan]."

But Rudden did have a father who had been in the rent-to-own
industry more than two decades. More important, his dad had friends
who were willing to take a chance on a Young Turk with a college
degree and six month's experience under his father's
tutelage. "I also met quite a few people through my wife, who
works at a mortgage brokerage in Denver," says Rudden.

After all his campaigning and presentations, Rudden had
assembled a group of investors comprised of older family friends
and thirty-somethings who liked the idea of backing a young
entrepreneur. Acknowledging that the combination of 40 percent
interest in the store coupled with guaranteed annual interest
payments of 12 percent, paid monthly, was an unusual incentive,
Rudden says the package had to be attractive to overcome the
reluctance people might have had because of his youth.

To sweeten the pot even further for interested investors, he put
interest payments in an account in their kids' names. "So
14 years down the road, their children's college tuition is
paid," says Rudden. Among the other attributes of his package
are a concrete exit strategy and the first right of refusal to
invest in additional locations.

Although he liked the formula for his first two stores, Rudden
decided to make a change when he opened his third store in Hemet,
California, this past April. He scaled back to four investors and
added third-party financing. "I'm changing the formula so
I won't have as many investors," says Rudden, who is
convinced he couldn't have opened his stores any other way.
"Now I only need to raise $100,000 instead of
$300,000."

Out With the Old

Why are fewer franchisees turning to traditional commercial
loans for assistance? For one good reason: Obtaining a commercial
loan to finance a franchise is as easy as finding the proverbial
needle in a haystack. Banks are looking for a collaterized loan,
and typically in a franchise, there's no real estate involved;
it's a leased facility," explains Kirk Fullerton, senior
vice president and manager of the SBA lending group at Dallas-based
Compass Bank.

Banks want businesses to have three basic qualifications,
according to Fullerton: reasonable financial strength and good
personal credit of business owners, as well as quality projections.
Consequently, says Fullerton, "they have a problem with a
start-up on the front end." He adds that most banks are only
willing to go three years on a loan without a government
guarantee--bad news for franchisees, who typically look for terms
of seven to 10 years.

When it comes to collateral, Fullerton says banks want a proven
cash-flow stream, and even with the backing of a franchise system,
there are still the issues of mismanagement and an unprofitable
market.

Consequently, if you want a non-SBA loan from your local bank,
be prepared to supply strong collateral that guarantees the bank
repayment in case your business fails.